Friday, March 12, 2010

Cut Spending, Increase Economic Distress

In his interesting, if somewhat misguided, column on Thursday in The New York Times, David Brooks captures the essence of President Obama:

The fact is, Obama is as he always has been, a center-left pragmatic reformer. Every time he tries to articulate a grand philosophy — from his book “The Audacity of Hope” to his joint-session health care speech last September — he always describes a moderately activist government restrained by a sense of trade-offs. He always uses the same on-the-one-hand-on-the-other sentence structure. Government should address problems without interfering with the dynamism of the market.

Unfortunately, the right-of-center Brooks likes the part of being restrained by a sense of trade-offs and not interfering with the "dynamism of the market." Not surprisingly, Brooks fails to recognize that the near-destruction of the economy by powerful Wall Street interests demands a President committed to an activist government and willing to intervene in a market distorted by those bent on get enormously rich-quick financial schemes.

The lingering recession, and deep recession faced by Barack Obama upon taking office, have necessitated aggressive action by the Chief Executive. However, Brooks refers to(Obama's failure to respond to) "the greatest moral challenge of our day: the $9.7 trillion in new debt being created this decade."

One of the most curious- or perhaps disturbing- element of the public debate over President Obama's response to the economic crisis has been the the right's sudden concern over deficits. (If you want to be smug and condescending, call it a "born again" concern about deficits. But only if you want to be smug and condescending.) Deficits were enormous, and the national debt ballooned, during the reign of King George the XLIII so that the supremely wealthy could get their tax breaks.

But it goes beyond that, beyond the whiff of hypocrisy. It is downright irresponsible to get exorcised over deficits in the face of severe recession. Running deficits in a time of depression may be counter-intuitive to many people, given that when times are tough in the family, its spending will drop. But national policy more rationally is countercylical; when spending drops among those families and businesses- throughout the private sector- government has to pick up the slack and spur demand by increasing spending.

Further, our current debt-to-GDP ratio is not at an historically high level, as economist Dean Baker explains:

The current projections show that even ten years out on our current course the ratio of debt to GDP will be just over 90 percent. The ratio of debt to GDP was over 110 percent after World War II. Instead of impoverishing the children of that era, the three decades following World War II saw the most rapid increase in living standards in the country's history.

We can also look to Japan, which now has a debt to GDP ratio of more than 180 percent. Investors are not running from Japanese debt. They are willing to hold long-term debt at interest rates close to 1.5 percent. In our own case, the 3.7 percent interest rate on long-term Treasury bonds remains near a historic low.

Brooks, who is not a fire-breathing extremist, GOP water-carrier, or prone to condescending smugness, is not the only figure who seems unable to understand this. Take for example, the fire-breathing extremist and GOP water-carrier given to condescending smugness who is on the radio for three hours every weekday:

I have to tell you, the more public employment we get and the more money that goes to those jobs the less of it in the private sector. Jobs in the private sector produce things. Jobs in the government sector are a drain on the private sector by definition. You have to take money out of the private sector in the form of taxes, printing it, or borrowing it, in order to pay this ever-expanding group of government employees which does not produce anything. They are a pure drain.

Ignore, for now, the elitism inherent in referring to a large group of working class and middle class Americans as "a pure drain." Concentrate instead on the contradictions in Limbaugh's thinking.

As President Obama evidently understands, in a recession the federal government should not raise taxes but needs to increase spending. Ad so the deficit has risen, though not as calamitously as the GOP claims. While the federal government spends, jobs increase, more money goes into workers' pockets, and consumer spending increases. Not rocket science, you would think.

But if the federal government does not give to state governments "in order to pay this ever-expanding group of government employees," the state governments face a Hobson's choice, as forty-one of them do now. They can cut the size of their workforce, throwing working class and middle class Americans out of work and their families into an economic tailspin. At which point they will stop spending, creating a further drag on the economy, including increased job loss. Less is bought, and sales tax revenue declines, as does income tax revenue because, obviously, the employee is no longer an employee.

Alternatively, the state government can increase the rate of a broad-based (income or sales) tax or increase user or other fees. But that approach carries its own set of problems, especially in a recession.

Economics 101 they call it, though not everyone accepts these basic tenets of Keynesian economics. Still, when a Republican such as Rush Limbaugh goes on a rant intended to instill fear about public spending, or a sane Republican like Brooks anguishes over the deficit, they ought to do a better job of explaining why we should believe him.